Earnings growth is likely to be lacklustre for January-March 2018. Bottom-up aggregation of consensus estimates for Nifty companies suggests expectations of only 4 percent year-on-year earnings growth in Q4FY18, slower than the run-rate of 6 percent in the first nine months of 2017-18. That is despite revenue growth expectations inline with April-December 2017 trends of 12 percent year-on-year.
If Q4FY18 earnings expectations play out, full-year FY18 earnings growth will be in mid-single digits. The street has yet to cut its full-year earnings estimates to reflect the latest Q4 expectations, as full-year numbers still imply 10+ percent growth in FY18 – meeting this would require a solid beat in Q4. The consensus expects earnings pressure in Q4 for metals/mining and cement, while UBS expects pressure on banking sector earnings.
Sectorally, we expect automobile original equipment manufacturer margins to expand quarter-on-quarter in Q4FY18, as volume growth has been strong and companies have taken price increases to offset rising commodity prices.
We estimate volume-led revenue growth of 10 percent year-on-year for consumer companies.
Gross margin profiles should start improving, given relatively muted raw material inflation, and focus on cost savings should lead to an EBITDA margin improvement of 190 basis points year-on-year.
Banking sector earnings are seen under pressure (and below consensus) due to a significant clean-up in asset quality because of the new Reserve Bank of India rules. System loan growth has improved slightly.
Volume growth for the cement industry is expected to be in mid-single digits. We expect cost pressure (fuel and freight) to impact EBITDA/tonne across companies. Headline revenue growth improvement for industrials could be aided by a low base, while infra companies are likely to see moderate revenue growth on sluggish execution.
Oil marketing companies are expected to enjoy robust marketing volumes and a 6-10 percent year-on-year increase in marketing margins due to timely pass-through of rising Brent prices.
Realisations for steel and coal are likely to expand quarter-on-quarter. Our covered information technology services companies are expected to report normal seasonality and our constant-currency quarter-on-quarter revenue forecasts remain conservative in a range of 0.4-1.8 percent. A currency tailwind of 80-140 basis points is likely to boost reported dollar revenue.
We expect positive EBITDA growth for pharma after four consecutive quarters of year-on-year declines.
In terms of the outlook for FY19, recent high-frequency data prints have again created hopes of a recovery. Our conclusion from an analysis of the data is that growth is recovering back to trends seen during FY14-H1FY17, after disruption over the past five quarters, but not beyond. The market seems to be pricing in a stronger recovery.
Our top-down expectation for Nifty earnings growth in FY19 is 13 percent.
This implies a 10 percent cut to the Nifty FY19 consensus earnings estimate, as the 23 percent year-on-year growth being built in by the consensus view is very optimistic.
Apart from earnings disappointment, there are potential near-term sentiment dampeners for Indian markets that make risk-reward unattractive. The market expects Prime Minister Narendra Modi to win the 2019 election but some concerns are emerging – recent Opposition alliances have resulted in by-election poll losses for the BJP, and we believe potential alliances of Opposition parties will be a key element to track for investors.
Other near-term worries for markets include: The potential outflow of foreign funds following Indian exchanges’ decision to stop data sharing; slowing local flows; rising inflation; and oil prices. The recent instance of fraud opens up another dimension of risk for the banking sector.
The Indian equity market has underperformed peers by 5 percent in 2018 year-to-date but one-year forward price-to-earnings of 17x (off earnings estimates that are likely to get cut 10 percent) is still rich versus the last 3-5-year average of 16.4x/15.6x.
Our Nifty base-case target for end-2018 is 10,500, with upside/downside scenarios of 11,900/8,800.
We remain overweight IT services, private banks, downstream oil and gas, and property. We remain underweight industrials/infrastructure and small and mid-caps.
(Gautam Chhaochharia is the head of India research at UBS Securities. The views expressed are the author’s alone. The Quint neither endorses nor is responsible for the same.)
(Published in an arrangement with BloombergQuint.)
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